Crius Energy Trust Reports First Quarter 2018 Results

Despite challenging weather conditions and one-time costs, deregulated energy business produces $22.2 million in Adjusted EBITDA

 Crius Energy increasing cost reduction target to $20-25 million, appointing advisor to explore strategic alternatives for solar business, and commencing purchases under NCIB program

/NOT FOR DISTRIBUTION IN THE UNITED STATES OR OVER UNITED STATES WIRE SERVICES/

TORONTO, May 15, 2018 /CNW/ -  Crius Energy Trust ("Crius Energy" the "Company" or the "Trust") (TSX: KWH.UN) today announced its financial results as at and for the three month period ended March 31, 2018. All figures are in U.S. dollars unless otherwise noted. In this news release, references to "C$" are to Canadian dollars.

"Our first quarter highlighted the strength of our deregulated energy business, with $22.2 million in Adjusted EBITDA, representing 31% growth year-over-year despite extreme cold weather and volatility in wholesale energy prices," commented Michael Fallquist, Chief Executive Officer of Crius Energy. "After an extensive review of strategies to enhance Unitholder value, we've determined that focused execution on our deregulated energy business, aimed at increasing profitability through cost reduction and high-margin growth, will best position us to create value for our Unitholders. We firmly believe that our current Unit price does not accurately reflect the Company's intrinsic value and, accordingly, plan to start purchasing Units under our NCIB program as soon as possible."

Financial Highlights

• Revenue of $321.8 million in the first quarter of 2018, representing a 81.4% increase from $177.4 million in the first quarter of 2017.
• Gross margin of 18.6% of total revenue for the first quarter of 2018, representing a decrease from gross margin of 20.9% in the first quarter of 2017.
• Adjusted EBITDA of $19.8 million in the first quarter of 2018, representing an increase from $14.5 million achieved in the first quarter of 2017. During the quarter, the deregulated energy business contributed $22.2 million in Adjusted EBITDA - or $23.2 million after normalizing for $1.0 million in one-time general and administrative expenses as described below - compared to $16.9 million in the prior comparable period, which was offset by negative contribution from the solar business of $2.3 million, which was in line with the negative contribution of $2.4 million in the prior comparable period.
• Net income of $4.3 million in the first quarter of 2018, compared to a net loss of $26.3 million in the first quarter of 2017.
• Distributable Cash of $3.7 million in the first quarter of 2018, representing a decrease from $7.7 million for the first quarter of 2017. The Payout Ratio for the last twelve months was 77.7%.
• Cash flows from operating activities of $20.8 million in the first quarter of 2018, compared to negative $8.2 million in the first quarter of 2017.

Operational Highlights

• Net customer attrition of 21,000 customers in the first quarter of 2018, with Crius Energy's customer count totaling 1,389,000 customers at the end of the quarter.
• • Added 155,000 customers including 140,000 organically from sales and marketing channels and 15,000 through acquisition. Organic gross adds represented a decrease from the average in the prior four quarters of 167,500, due to a focus on higher-margin residential and small commercial customers resulting in reduced contribution from the large commercial and municipal aggregation channels which were strong contributors to gross adds over the prior four quarters.
  • Gross customer drops in the first quarter of 176,000 customers were higher than the average in the prior four quarters of 148,000. The increased number of customer drops reflects both the expanded size of the portfolio as a result of the acquisition of U.S. Gas & Electric, Inc. ("USG&E"), as well as elevated end-of-term large commercial non-renewals in the quarter.
    
    
• Continued positive results from the integration of the USG&E business
• • Based on integration activities achieved in the first quarter of 2018, of the previously communicated $10-12 million in expected cost synergies, the Company expects to achieve an annualized run-rate of $10 million in cost synergies by the end of the second quarter of 2018, approximately half of which are expected to be realized in the latter half of 2018, net of integration costs.
  • The Company plans to enter into a renegotiated consolidated credit facility in the second quarter of 2018, which as previously communicated is expected to benefit synergies to Distributable Cash through improved pricing and trading terms.

Growth and Corporate Highlights

• Held our 3rd annual Analyst Day on January 30, 2018
• • Revised capital allocation strategy to focus on growth initiatives by re-prioritizing the uses of cash flow (in order of priority): (1) growth initiatives; (2) Unit repurchases; (3) debt reduction; and (4) distribution growth.
  • Growth initiatives to focus on accretive acquisitions and higher-margin organic growth including residential and small commercial customer segments.
  • Announced portfolio optimization initiative expected to increase short-term customer attrition while creating long-term customer portfolio value through enhanced margins and improved retention.
    
    
• Positive resolution of legal and regulatory matters
• • During the first quarter of 2018, the Company successfully achieved resolution and settlement of the previously-announced legal and regulatory matters.
  • The Company maintains a legal reserve of $9.2 million for its remaining net exposure relating to these matters, which is expected to be paid out over the next 18 months. 

Review of Q1 2018 Results

The first quarter of 2018 was highlighted by 37.3% quarter-over-quarter growth in Adjusted EBITDA, with the improvement largely driven by the acquisition of USG&E in the third quarter of last year. Management is pleased with the $22.2 million Adjusted EBITDA contribution of the deregulated energy business, particularly given the impact of certain one-time costs detailed below and the challenging weather conditions experienced in January 2018, with extreme cold temperatures and volatility in wholesale energy prices. While the weather event did impact our results, which is reflected in lower electric unit margins realized in the quarter, Management view the overall financial performance of the deregulated energy business in these volatile conditions as a testament to the Company's industry-leading risk management capabilities and diverse customer portfolio.

Revenues increased 81.4% in the first quarter of 2018 to $321.8 million from $177.4 million in the prior comparable period primarily due to the addition of customers associated with the acquisition of USG&E, and increased customer usage due to temperatures being approximately 12% cooler than in the prior comparable period, as measured in Heating Degree Days. Additionally, solar revenues increased from $0.3 million in the first quarter of 2017 to $3.1 million in the first quarter of 2018, following the ramp-up in sales and marketing activities as the Company integrated the assets acquired from Verengo, Inc. and SunEdison Inc.

Gross margin for the first quarter of 2018 was $59.8 million, an increase from $37.1 million of gross margin in the first quarter of 2017, primarily driven by the incremental gross margin from the USG&E business. As a percentage of total revenue, gross margin was 18.6% in the first quarter of 2018, a decrease from 20.9% in the prior comparable quarter, with the period-over-period decrease being impacted by the above-mentioned weather conditions compounded by the commencement of service during the quarter of a large municipal aggregation of approximately 134,000 customers in Massachusetts, partially offset by the addition of the higher-margin USG&E customer portfolio.

Adjusted EBITDA in the first quarter of 2018 was $19.8 million, a 37.3% increase from the $14.5 million reported in the first quarter of 2017, with the increase driven by the contribution from the USG&E business. First quarter 2018 Adjusted EBITDA results were comprised of a $22.2 million contribution from the deregulated energy business and a negative $2.3 million contribution from the solar business. The deregulated energy contribution was adversely impacted by $1.0 million in one-time general and administrative expenses associated with a Board-initiated internal process to evaluate strategies to enhance Unitholder value (refer to the "Outlook" section of the MD&A (as defined herein) for the first quarter of 2018, dated May 15, 2018 for further details) and the proxy process for the annual and special meeting of Unitholders scheduled to be held on May 29, 2018. Normalizing for these items, Adjusted EBITDA from the deregulated energy business would have been $23.2 million for the first quarter of 2018, representing 37% growth on the prior comparable period contribution of $16.9 million. Additionally, Adjusted EBITDA was negatively impacted by a net $1.2 million in the quarter due to certain accounting impacts including the impact of the implementation of the new IFRS-15 accounting standard, which came into effect on January 1, 2018, and are more fully described in the Gross Margin and Selling Expenses sections of the "Discussion of Operations" in the MD&A for the first quarter of 2018, dated May 15, 2018.

Net income in the first quarter of 2018 was $4.3 million, an increase from a net loss of $26.3 million in the first quarter of 2017, with the year-over-year increase impacted by an increased tax benefit of $29.1 million including the recognition of previously unrecognized deferred tax assets.

Management is pleased to report a positive resolution and settlement of the previously announced legal and regulatory matters for which the Company established a legal reserve in the first half of 2017. As of the MD&A for the first quarter of 2018, dated May 15, 2018, the legal reserve for any remaining net exposures to the Company is $9.2 million, which is expected to be paid over the next 18 months.

Distributable Cash was $3.7 million in the first quarter of 2018 compared to $7.7 million in the first quarter of 2017. Total Distributions paid in the first quarter of 2018 were $9.2 million, compared to $5.8 million in the first quarter of 2017. The period-over-period decrease in Distributable Cash of $4.0 million was impacted by $3.2 million in increased wholesale electric capacity costs resulting from the implementation of the new IFRS-15 accounting standard in the current quarter which is a seasonal timing impact only and will reverse in the upcoming quarters, plus $8.0 million in increased upfront selling costs compared to the prior comparable quarter reflecting the channel mix of new sales in the quarter, with increased contribution from residential customer-focused direct-to-consumer marketing channels which have higher upfront costs to acquire. Upfront selling costs averaged $66 per customer in the first quarter of 2018, compared to $8 per customer in the prior comparable quarter. The Company expects to benefit in future quarters from these increased upfront selling cost investments which are focused on higher-margin residential customers. The increase in Total Distributions paid is attributable to increases in the number of Units outstanding and increase in the amount distributions per Unit compared to the first quarter of 2017. The Payout Ratio for the trailing twelve months ending March 31, 2018 is 77.7%, compared to 63.8% for the year ended December 31, 2017, with the increase attributable to the above-mentioned items.

Cash flows provided by operating activities were $20.8 million in the first quarter of 2018, an increase from negative $8.2 million in the first quarter of 2017, with the year-over-year increase primarily attributable to improved Adjusted EBTIDA performance and changes in operating assets and liabilities.

As at March 31, 2018, Crius Energy had 1,389,000 customers, representing a net customer decline of 21,000 or 1.5% in the quarter, an improvement over the prior quarter decline of 36,000 or 2.5% in customers. The gross additions of 155,000 customers, including 140,000 organically from sales and marketing channels and 15,000 through acquisition, were lower than the average in the prior four quarters of 167,500, due to a reduced contribution from the large commercial and municipal aggregation channels which were strong contributors to gross customer adds over the prior four quarters. This reflects Management's intentional focus on higher-margin residential and small commercial segments and a more disciplined approach to ensuring customer growth is at acceptable target margins. Gross customer drops in the first quarter of 2018 totaled 176,000 customers compared to the average in the prior four quarters of 148,000. The increased number of customer drops reflects the expanded size of the portfolio as a result of the acquisition of USG&E, as well as elevated end-of-term non-renewals in the large commercial segment in the quarter and initial steps taken to implement portfolio optimization initiatives. Despite the net 1.5% decline in customers during the quarter, the Embedded Margin in the portfolio increased by an estimated $6.7 million or 2.9% per customer in the quarter, benefiting from the customer adds being from higher-margin direct-to-consumer residential and small commercial channels, as compared to customer drops, which were driven by a large number of end-of-term large commercial and municipal aggregations, where the Company was not able to renew customers at acceptable target margins.

At March 31, 2018, the Trust had Total Cash and Availability of $50.0 million, consisting of $22.6 million of cash and cash equivalents, and $27.4 million available under the Company's credit facilities. This compares to the Total Cash and Availability as at December 31, 2017 of $49.4 million, consisting of cash and cash equivalents of $18.2 million and $31.2 million of availability under the credit facility. The Company has $50.3 million in long-term debt, consisting of a $6.3 million subordinated, forgivable term loan with the Connecticut Department of Economic and Community Development at an annual interest rate of 2.0%, and a subordinated promissory note with certain shareholders of USG&E related to the acquisition in the net amount, after post-closing working capital adjustments of $44.0 million at an annual interest rate of 9.5%. Crius Energy ended the quarter with net debt of $87.8 million, representing a conservative leverage ratio of 1.3x based on net debt to last twelve months Adjusted EBTIDA.

The increased performance of the deregulated energy business in the first quarter of 2018 and significant progress made towards integrating USG&E and delivering on our targeted acquisition synergies highlight the Company's successful organic and acquisition growth strategy and scalable operating platform.

The interim condensed consolidated financial statements of the Trust as at and for the three month period ended March 31, 2018 and accompanying management's discussion and analysis ("MD&A") have been filed with the securities regulators and are available on SEDAR at www.sedar.com under the Trust's issuer profile, and are available on the Trust's website at www.criusenergytrust.ca.

Conference Call Notice

The Trust will hold a conference call on May 15, 2018 at 8:30 a.m. (Toronto time) to discuss the financial results for the first quarter of 2018.

To access the conference call by telephone, dial 647-427-7450 or 1-888-231-8191. A question and answer session for analysts will follow management's presentation.

A live audio webcast of the conference call will be available by following this link: Crius Energy Q1 2018 Results and will also be archived there for 90 days.

A digital rebroadcast will be available to listeners starting at 11:30 a.m. (Toronto time) on May 15, 2018 until May 22, 2018. To access the rebroadcast, please dial 416-849-0833 or 1-855-859-2056 and enter passcode 9286568#.

About Crius Energy Trust

With approximately 1.4 million residential customer equivalents, the Company provides innovative electricity, natural gas and solar products to residential and commercial customers through exclusive partnerships, direct-to-consumer, digital, and broker marketing channels. Our unique brands offer consumers a broad suite of energy products and services including fixed and variable contracts, renewable energy, and bundled products to support their energy needs beyond what is offered by their local utility. Company growth is achieved organically with customers acquired through our diversified marketing channels and through accretive acquisitions. The Company currently sells energy products in 19 states and the District of Columbia with plans to continue expanding its geographic reach. The Company is well-positioned to deliver capital appreciation and stable distributions to investors.

The Trust intends to continue to qualify as a "mutual fund trust" under the Income Tax Act (Canada) (the "Tax Act"). The Trust will not be a "SIFT trust" (as defined in the Tax Act), provided that the Trust complies at all times with its investment restriction which precludes the Trust from holding any "non-portfolio property" (as defined in the Tax Act). Material information pertaining to Crius may be found on SEDAR under the Trust's issuer profile at  www.sedar.com or on the Trust's website at  www.criusenergytrust.ca .

Caution Regarding Forward-Looking Statements

This news release contains forward-looking statements and forward-looking information (collectively, "forward-looking statements") including, without limitation, statements relating to non-IFRS financial measures; the confidence of Management and the Board in the long-term outlook for the Company; the results, if any, of the third-party advisor to explore strategic alternatives for the solar business; the continued strength of the Company's deregulated energy business; the risk management capabilities of the Trust; the ability of the Trust to sustain or increase the level of its distributions; the anticipated benefits and continued integration of the business of USG&E; implementation of the Company's capital allocation strategy outlined at the Analyst Day on January 30, 2018 in Miramar, Florida; potential international expansion, including the United Kingdom; the Company's ability to renew customers at acceptable target margins; the continuation of year-over-year growth of the Company's customer base; the ramp-up of sales and marketing activities; the continuation of the recent trend of a changing customer mix; the Trust's outlook, strategy, and ability to execute its business objectives; future payments owed to the Company; the electricity, natural gas and solar industries; governmental regulatory regimes; acquisitions and strategic partnerships; marketing channels; customers and customer growth; hedging strategies; risk management; market risk; credit risk; off-balance sheet arrangements; related party-transactions; liquidity and capital resources; critical accounting estimates; internal controls over financial reporting; results of operations; financial position or cash flows; expenses and distributions to Unitholders. Often, but not always, forward-looking statements can be identified by the use of words such as "plans", "expects" or "does not expect", "is expected", "budget", "scheduled", "estimates", "forecasts", "intends", "anticipates" or "does not anticipate", or "believes", or describes a "goal", or variation of such words and phrases or state that certain actions, events or results "may", "could", "would", "might" or "will" be taken, occur or be achieved. All forward-looking statements reflect the Trust's beliefs and assumptions based on information available at the time the statements were made. Actual results or events may differ from those predicted in these forward-looking statements. All of the Trust's forward-looking statements are qualified by: (i) the assumptions that are stated or inherent in such forward-looking statements; and (ii) the risks described in the section entitled "Financial Instruments and Risk Management" in the MD&A for the first quarter of 2018, dated May 15, 2018, and the risks described in the sections entitled "Risk Factors" and "Forward-Looking Statements" in the annual information form of the Trust for the fiscal year ended December 31, 2017, dated March 8, 2018, which are available on SEDAR under the Trust's issuer profile at www.sedar.com and on the Trust's website at www.criusenergy.ca . Forward-looking statements involve known and unknown risks, future events, conditions, uncertainties and other factors which may cause the actual results, performance or achievements to be materially different from any future results, prediction, projection, forecast, performance or achievements expressed or implied by the forward-looking statements. Although the Trust has attempted to identify important factors that could cause actual actions, events or results to differ materially from those described in forward-looking statements, there may be other factors that cause actions, events or results not to be as anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. The Trust disclaims any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events, or otherwise, except in accordance with applicable securities laws.

Non-IFRS Financial Measures

Statements throughout this news release make reference to Adjusted EBITDA, Distributable Cash, Embedded Margin, Total Distributions, Payout Ratio, and Total Cash and Availability which are non-IFRS financial measures commonly used by financial analysts in evaluating the financial performance of companies, including companies in the energy industry. Accordingly, Management believes these non-IFRS financial measures may be useful metrics for evaluating the Trust's financial performance as they are measures that Management uses internally to assess performance, in addition to IFRS measures. As there is no generally accepted method of calculating these non-IFRS financial measures, these terms as used herein are not necessarily comparable to similarly titled measures of other companies. These non-IFRS financial measures have limitations as analytical tools and should not be considered in isolation from, or as an alternative to, net income (loss), cash flow provided from (used in) operating activities or other data prepared in accordance with IFRS. Additionally, there may be certain items included or excluded from these non-IFRS financial measures that are significant in assessing the Trust's operating results and liquidity. Refer to the MD&A for additional information concerning these non-IFRS financial measures and reconciliations to the closest IFRS measures, as applicable.

SOURCE Crius Energy Trust

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